Significant upside potential
Since falling heavily post-Brexit, Prudential (LSE: PRU) has risen sharply. For example, it is up by 10% today as investor sentiment in the wider index improves.
Of course, the financial services sector’s future is rather uncertain. The prospect of a recession in the UK is understandably causing investors to remain cautious about the outlook for companies in the sector. However, Prudential’s key growth driver over the coming years is likely to be emerging markets, which makes now an excellent time to buy it for the long term.
Notably, financial product penetration in China and the emerging world is relatively low. This creates an opportunity for Prudential to capitalise on its position in those markets. Its diverse product offering should provide a degree of stability if China’s transition towards a consumer-focused economy continues to be rather volatile, while Prudential’s share price offers significant upside potential.
For example, Prudential trades on a price-to-earnings (P/E) ratio of just 10.4. This indicates that it offers a wide margin of safety, so further share price falls may be somewhat limited, while capital gain prospects are high.
Dividend cuts unlikely
Also rising rapidly today is G4S (LSE: GFS). The security specialist is up by 9% since today’s open and that’s at least partly because of improved sentiment in the wider market. G4S is heavily UK-focused, and so its outlook is highly dependent upon the performance of the UK economy. This means that volatility in G4S’s shares is likely to remain high, but its wide margin of safety could make it a sound buy.
For example, G4S has a P/E ratio of 11.6. This indicates that upward re-rating potential is high, especially since it’s due to record positive earnings growth in each of the next two years. Furthermore, it yields 5.4% from a dividend that is covered 1.6 times by profit. This indicates that dividend cuts are unlikely even if G4S’s profitability comes under pressure. Such a high income could prove useful if the wide index falls further and bargains are on offer.
Increased appeal
Shares in Legal & General (LSE: LGEN) have also risen sharply today. The diversified financial services company has soared by 9%, but this still leaves it trading on a low valuation. In fact, Legal & General’s yield of 8% indicates that its shares are dirt cheap.
Certainly, such a yield is exceptionally high, but its dividend is expected to be covered 1.4 times by profit this year. This indicates that a dividend cut is unlikely and this could increase Legal & General appeal, in what is likely to remain a low interest rate environment.
Legal & General’s track record of earnings growth marks it out as a somewhat more stable financial services play than a number of its peers. It has recorded double-digit bottom line growth in each of the last four years. Despite there being no certainty that this will continue, Legal & General appears to be financially sound and in possession of a logical strategy through which to grow its top and bottom lines in the long run.
